STANDARD MOTOR PRODUCTS, INC. - Quarter Report: 2022 September (Form 10-Q)

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑     No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐     No ☑

As of the close of business on October 27, 2022, there were 21,570,097 outstanding shares of the registrant’s Common Stock, par value $2.00 per share.

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STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION

PART II – OTHER INFORMATION

PART I - FINANCIAL INFORMATION

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(a) Throughout this Form 10-Q, “SMP” refers to Standard Motor Products, Inc. and subsidiaries.

See accompanying notes to consolidated financial statements (unaudited).

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

See accompanying notes to consolidated financial statements (unaudited).

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements (unaudited).

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements (unaudited).

STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended September 30, 2022

(Unaudited)

(In thousands)		Common Stock				Capital in Excess of Par Value				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Total SMP				Non- Controlling Interest				Total
Balance at June 30, 2022		$	47,872			$	109,117			$	559,069			$	(15,178	)		$	(99,294	)		$	601,586			$	11,063			$	612,649
Net earnings			—				—				8,846				—				—				8,846				52				8,898
Other comprehensive income, net of tax			—				—				—				(3,967	)			—				(3,967	)			(115	)			(4,082	)
Cash dividends paid			—				—				(5,780	)			—				—				(5,780	)			—				(5,780	)
Purchase of treasury stock			—				—				—				—				(3,160	)			(3,160	)			—				(3,160	)
Stock-based compensation			—				(4,706	)			—				—				6,568				1,862				—				1,862
Balance at September 30, 2022		$	47,872			$	104,411			$	562,135			$	(19,145	)		$	(95,886	)		$	599,387			$	11,000			$	610,387

(In thousands)		Common Stock				Capital in Excess of Par Value				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Total SMP				Non- Controlling Interest				Total
Balance at June 30, 2021		$	47,872			$	107,062			$	500,620			$	(5,102	)		$	(66,836	)		$	583,616			$	11,501			$	595,117
Net earnings			—				—				24,050				—				—				24,050				13				24,063
Other comprehensive income, net of tax			—				—				—				(2,490	)			—				(2,490	)			20				(2,470	)
Cash dividends paid			—				—				(5,544	)			—				—				(5,544	)			—				(5,544	)
Purchase of treasury stock			—				—				—				—				(15,422	)			(15,422	)			—				(15,422	)
Stock-based compensation			—				2,513				—				—				295				2,808				—				2,808
Balance at September 30, 2021		$	47,872			$	109,575			$	519,126			$	(7,592	)		$	(81,963	)		$	587,018			$	11,534			$	598,552

(In thousands)		Common Stock				Capital in Excess of Par Value				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Total SMP				Non- Controlling Interest				Total
Balance at December 31, 2021		$	47,872			$	105,377			$	532,319			$	(8,169	)		$	(75,819	)		$	601,580			$	11,047			$	612,627
Net earnings			—				—				47,418				—				—				47,418				129				47,547
Other comprehensive income, net of tax			—				—				—				(10,976	)			—				(10,976	)			(176	)			(11,152	)
Cash dividends paid			—				—				(17,602	)			—				—				(17,602	)			—				(17,602	)
Purchase of treasury stock			—				—				—				—				(29,656	)			(29,656	)			—				(29,656	)
Stock-based compensation			—				(1,335	)			—				—				7,662				6,327				—				6,327
Employee Stock Ownership Plan			—				369				—				—				1,927				2,296				—				2,296
Balance at September 30, 2022		$	47,872			$	104,411			$	562,135			$	(19,145	)		$	(95,886	)		$	599,387			$	11,000			$	610,387

(In thousands)		Common Stock				Capital in Excess of Par Value				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Total SMP				Non- Controlling Interest				Total
Balance at December 31, 2020		$	47,872			$	105,084			$	463,612			$	(5,676	)		$	(60,656	)		$	550,236			$	—			$	550,236
Noncontrolling interest acquired			—				—				—				—				—				—				11,504				11,504
Net earnings			—				—				72,192				—				—				72,192				32				72,224
Other comprehensive income, net of tax			—				—				—				(1,916	)			—				(1,916	)			(2	)			(1,918	)
Cash dividends paid			—				—				(16,678	)			—				—				(16,678	)			—				(16,678	)
Purchase of treasury stock			—				—				—				—				(26,518	)			(26,518	)			—				(26,518	)
Stock-based compensation			—				4,357				—				—				2,832				7,189				—				7,189
Employee Stock Ownership Plan			—				134				—				—				2,379				2,513				—				2,513
Balance at September 30, 2021		$	47,872			$	109,575			$	519,126			$	(7,592	)		$	(81,963	)		$	587,018			$	11,534			$	598,552

Note 1.  Basis of Presentation

Standard Motor Products, Inc. and subsidiaries (referred to hereinafter in these notes to the consolidated financial statements as “we,” “us,” “our,” “SMP,” or the “Company”) is a leading manufacturer and distributor of premium replacement parts utilized in the maintenance, repair and service of vehicles in the automotive aftermarket industry along with a complementary focus on specialized equipment parts for manufacturers across multiple industries around the world.

The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.  The unaudited consolidated financial statements include our accounts and all domestic and international companies in which we have more than a 50% equity ownership, except in instances where the minority shareholder maintains substantive participating rights, in which case we follow the equity method of accounting.  In instances where we have more than a 50% equity ownership and the minority shareholder does not maintain substantive participating rights, our consolidated financial statements include the accounts of the company on a consolidated basis with its net income and equity reported at amounts attributable to both our equity position and that of the noncontrolling interest.  Investments in unconsolidated affiliates are accounted for on the equity method, as we do not have a controlling financial interest but have the ability to exercise significant influence.  All significant inter-company items have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire year.

Reclassification

Certain prior period amounts in the accompanying consolidated financial statements and related notes have been reclassified to conform to the 2022 presentation.

The preparation of consolidated annual and quarterly financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods.  We have made a number of estimates and assumptions in the preparation of these consolidated financial statements.  We can give no assurance that actual results will not differ from those estimates.  Although we do not believe that there is a reasonable likelihood that there will be a material change in the future estimates, or in the assumptions that we use in calculating the estimates, the uncertain future effects, if any, of disruptions in the supply chain caused by the COVID-19 pandemic, Russia’s invasion of the Ukraine and resultant sanctions imposed by the U.S. and other governments, future increases in interest rates, and other unforeseen changes in the industry, or business, could materially impact the estimates, and may have a material adverse effect on our business, financial condition and results of operations.  Some of the more significant estimates include allowances for expected credit losses, cash discounts, valuation of inventory, valuation of long-lived assets, goodwill and other intangible assets, depreciation and amortization of long-lived assets, product liability exposures, asbestos, environmental and litigation matters, valuation of deferred tax assets, share based compensation and sales returns and other allowances.

Derivative Instruments and Hedging Activities

We occasionally use derivative financial instruments to reduce our market risk for changes in interest rates on our variable rate borrowings.  Derivative financial instruments are recorded at fair value in other current and long-term assets, and other current and long-term liabilities in the consolidated balance sheets.  For derivative financial instruments that have been formally designated as cash flow interest rate hedges (“interest rate swap agreements”), provided that the hedging instrument is highly effective, the entire change in the fair value of the derivative will be deferred and recorded in accumulated other comprehensive income (“AOCI”) in the consolidated balance sheets. When the underlying hedged transaction is realized (i.e., when the interest payments on the underlying borrowing are recognized in the consolidated statements of operations), the gain/loss included in AOCI is recorded in earnings and reflected on the same line as the gain/loss on the hedged item attributable to the hedged risk (i.e., interest expense). At the inception of each transaction, we formally document the hedge relationship, including the identification of the hedge instrument, the related hedged items, the effectiveness of the hedge, as well as its risk management objectives and strategies.

Other than the addition of the foregoing accounting policy, “Derivative Instruments and Hedging Activities,” there have been no material changes to our critical accounting policies and estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021.

Recently Issued Accounting Pronouncements

Standards that are not yet adopted as of September 30, 2022

The following table provides a brief description of recently issued accounting pronouncements that have not yet been adopted as of September 30, 2022, and that could have an impact on our financial statements:

Purchase price						$	111,711
Assets acquired and liabilities assumed:
Receivables		$	9,173
Inventory			12,460
Other current assets (1)			5,193
Property, plant and equipment, net			4,939
Operating lease right-of-use assets			3,847
Intangible assets			54,700
Goodwill			49,250
Current liabilities			(5,072	)
Noncurrent operating lease liabilities			(3,065	)
Deferred income taxes			(8,210	)
Subtotal							123,215
Fair value of acquired noncontrolling interest							(11,504	)
Net assets acquired						$	111,711

(1)

The other current assets balance includes $4.6 million of cash acquired.

Purchase Price						$	2,924
Assets acquired and liabilities assumed:
Inventory		$	1,032
Machinery and equipment, net			1,137
Intangible assets			755
Net assets acquired						$	2,924

Note 4.  Restructuring and Integration Expenses

Restructuring Costs

Plant Rationalization Programs

The 2016 Plant Rationalization Program, which included the shutdown and sale of our Grapevine, Texas facility, and the 2017 Orlando Plant Rationalization Program, which included the shutdown our Orlando, Florida facility, have been substantially completed.  Cash payments made of $16,000 during the nine months ended September 30, 2022 consists of severance payments to former employees terminated in connection with these programs. There is no remaining aggregate liability as of September 30, 2022.

Note 5.  Sale of Receivables

We are party to several supply chain financing arrangements, in which we may sell certain of our customers’ trade accounts receivable to such customers’ financial institutions.  We sell our undivided interests in certain of these receivables at our discretion when we determine that the cost of these arrangements is less than the cost of servicing our receivables with existing debt.  Under the terms of the agreements, we retain no rights or interest, have no obligations with respect to the sold receivables, and do not service the receivables after the sale.  As such, these transactions are being accounted for as a sale.

Note 6.  Inventories

Inventories, which are stated at the lower of cost (determined by means of the first-in, first-out method) and net realizable value, consist of the following:

		September 30, 2022				December 31, 2021
		(In thousands)
Customer relationships		$	155,932			$	157,020
Patents, developed technology and intellectual property			14,123				14,123
Trademarks and trade names			8,880				8,880
Non-compete agreements			3,280				3,280
Supply agreements			800				800
Leaseholds			160				160
Total acquired intangible assets			183,175				184,263
Less accumulated amortization (1)			(85,005	)			(78,932	)
Net acquired intangible assets		$	98,170			$	105,331

Note 8.  Leases

We have operating and finance leases for our manufacturing facilities, warehouses, office space, automobiles, and certain equipment.  Our leases have remaining lease terms of up to eleven years, some of which may include one or more five-year renewal options.  We have not included any of the renewal options in our operating lease payments, as we concluded that it is not reasonably certain that we will exercise any of these renewal options.  Leases with an initial term of twelve months or less are not recorded on the balance sheet.  Operating lease expense is recognized on a straight-line basis over the lease term.  Finance leases are not material.

The following tables provide quantitative disclosures related to our operating leases and includes all operating leases acquired from the date of acquisition (in thousands):

(b)

Includes $21.6 million of right-of-use assets related to the lease modification and extension for our executive offices in Long Island City, New York during the nine months ended September 30, 2022 and $8.8 million of right-of use assets obtained in business acquisitions during the nine months ended September 30, 2021.

Minimum Lease Payments

At September 30, 2022, we are obligated to make minimum lease payments through 2033, under operating leases, which are as follows (in thousands):

Note 9.  Credit Facilities and Long-Term Debt

Total debt outstanding is summarized as follows:

Polish Overdraft Facility

In February 2022, our Polish subsidiary, SMP Poland sp. z.o.o., amended its overdraft facility with HSBC Continental Europe (Spolka Akcyjna) Oddzial w Polsce, formerly HSBC France (Spolka Akcyjna) Oddzial w Polsce.  The amended overdraft facility provides for borrowings of up to Zloty 30 million (approximately $6.1 million).  Availability under the amended facility commenced in March 2022, with automatic three-month renewals until 2027 subject to cancellation by either party, at its sole discretion, at least 30 days prior to the commencement of the three-month renewal period.  Borrowings under the overdraft facility will bear interest at a rate equal to WIBOR + 1.5% and are guaranteed by Standard Motor Products, Inc., the ultimate parent company.  At September 30, 2022 and December 31, 2021, borrowings under the overdraft facility were Zloty 4.9 million (approximately $1 million) and Zloty 12.3 million (approximately $3 million), respectively.

		Revolving Credit Facility				Term Loan Facility				Polish Overdraft Facility and Other Debt				Total
Remainder of 2022		$	—			$	1,250			$	1,036			$	2,286
2023			—				5,000				—				5,000
2024			—				5,000				—				5,000
2025			—				5,000				—				5,000
2026			—				7,500				—				7,500
2027			169,750				75,000				—				244,750
Total		$	169,750			$	98,750			$	1,036			$	269,536
Less: current maturities			(52,100	)			(5,000	)			(1,036	)			(58,136	)
Long-term debt		$	117,650			$	93,750			$	—			$	211,400

Deferred Financing Costs

(In thousands)
Remainder of 2022		$	127
2023			491
2024			478
2025			470
2026			464
2027			190
Total amortization		$	2,220

		Three Months Ended September 30, 2022
		Foreign Currency Translation				Unrecognized Postretirement Benefit Costs (Credit)				Unrealized derivative gains (losses)				Total
Balance at June 30, 2022  attributable to SMP		$	(15,326	)		$	43			$	105			$	(15,178	)
Other comprehensive income before reclassifications			(8,164	)			—				4,095	(1)			(4,069	)
Amounts reclassified from accumulated other comprehensive income			—				(2	)			104				102
Other comprehensive income, net			(8,164	)			(2	)			4,199				(3,967	)
Balance at September 30, 2022 attributable to SMP		$	(23,490	)		$	41			$	4,304			$	(19,145	)

		Nine Months Ended September 30, 2022
		Foreign Currency Translation				Unrecognized Postretirement Benefit Costs (Credit)				Unrealized derivative gains (losses)				Total
Balance at December 31, 2021 attributable to SMP		$	(8,221	)		$	52			$	—			$	(8,169	)
Other comprehensive income before reclassifications			(15,269	)			—				4,099	(1)			(11,170	)
Amounts reclassified from accumulated other comprehensive income			—				(11	)			205				194
Other comprehensive income, net			(15,269	)			(11	)			4,304				(10,976	)
Balance at September 30, 2022 attributable to SMP		$	(23,490	)		$	41			$	4,304			$	(19,145	)

		Three Months Ended				Nine Months Ended
Details About Accumulated Other Comprehensive Income Components		September 30, 2022				September 30, 2022
Derivative cash flow hedge:
Unrecognized gain (loss) (1)		$	141			$	277
Postretirement Benefit Plans:
Unrecognized gain (loss) (2)			(5	)			(18	)
Total before income tax			136				259
Income tax expense			34				65
Total reclassifications attributable to SMP		$	102			$	194

Note 11.  Stock-Based Compensation Plans

We account for our stock-based compensation plans in accordance with the provisions of FASB ASC 718, Stock Compensation, which requires that a company measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.  The cost is recognized in the consolidated statement of operations over the period during which an employee is required to provide service in exchange for the award.

Restricted and Performance Stock Grants

As part of the Plan, we currently grant shares of restricted stock to eligible employees and our independent directors and performance-based shares to eligible employees.  We grant eligible employees two types of restricted stock (standard restricted shares and long-term retention restricted shares).  Standard restricted shares granted to employees become fully vested no earlier than three years after the date of grant.  Long-term retention restricted shares granted to selected executives vest at a 25% rate on or within approximately two months of an executive reaching the ages 60 and 63, and become fully vested on or within approximately two months of an executive reaching the age 65.  Restricted shares granted to directors become fully vested upon the first anniversary of the date of grant.

Performance-based shares issued to eligible employees are subject to a three-year measuring period and the achievement of performance targets and, depending upon the achievement of such performance targets, they may become vested no earlier than three years after the date of grant.  Each period we evaluate the probability of achieving the applicable targets, and we adjust our accrual accordingly. Restricted shares (other than long-term retention restricted shares) and performance shares issued to certain key executives and directors are subject to a one or two year holding period upon the lapse of the vesting period.  Forfeitures on stock grants are estimated at 5% for employees and 0% for executives and directors based on our evaluation of historical and expected future turnover.

Our restricted and performance-based share activity was as follows for the nine months ended September 30, 2022:

We recorded compensation expense related to restricted shares and performance-based shares of $5.7 million ($4.2 million, net of tax) and $6.8 million ($5.1 million, net of tax) for the nine months ended September 30, 2022 and 2021, respectively. The unamortized compensation expense related to our restricted and performance-based shares was $16.6 million at September 30, 2022, and is expected to be recognized as they vest over a weighted average period of 4.55 years and 0.56 years for employees and directors, respectively.

Note 12.  Employee Benefits

We provide certain medical and dental care benefits to 14 former U.S. union employees. The postretirement medical and dental benefit obligation to the former union employees as of September 30, 2022, and the related net periodic benefit cost for the plan for the three and nine months ended September 30, 2022 and 2021 were not material.

We maintain a defined contribution Supplemental Executive Retirement Plan for key employees.  Under the plan, these employees may elect to defer a portion of their compensation and, in addition, we may at our discretion make contributions to the plan on behalf of the employees.  In March 2022, we made company contributions to the plan of $0.8 million related to calendar year 2021.

We also have an Employee Stock Ownership Plan for employees who are not covered by a collective bargaining agreement.  In connection therewith, we maintain an employee benefits trust to which we contribute shares of treasury stock.  We are authorized to instruct the trustees to distribute such shares toward the satisfaction of our future obligations under the plan. The shares held in trust are not considered outstanding for purposes of calculating earnings per share until they are committed to be released.  The trustees will vote the shares in accordance with their fiduciary duties.  During the nine months ended September 30, 2022, we contributed to the trust an additional 48,200 shares from our treasury and released 48,200 shares from the trust leaving 200 shares remaining in the trust as of September 30, 2022.